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The signalling hypothesis revisited: Evidence from foreign IPOs

  • Francis, Bill B

    ()

    (Lally School of Management and Technology)

  • Hasan, Iftekhar

    ()

    (Rensselaer Polytechnic Institute, USA and Bank of Finland Research)

  • Lothian, James R

    ()

    (Graduate School of Business, Fordham University)

  • Sun, Xian

    ()

    (Office of the Comptroller of the Currency, USA)

While the signalling hypothesis has played a prominent role as the economic rationale associated with the initial public offering (IPO) underpricing puzzle (Welch, 1989), the empirical evidence on it has been mixed at best (Jegadeesh, Weinstein and Welch, 1993; Michaely and Shaw, 1994). This paper revisits the issue from the vantage point of close to two decades of additional experience by examining a sample of foreign IPOs – firms from both financially integrated and segmented markets – in US markets. The evidence indicates that signalling does matter in determining IPO underpricing, especially for firms domiciled in countries with segmented markets, which as a result face higher information asymmetry and lack access to external capital markets. We find a significant positive and robust relationship between the degree of IPO underpricing and segmented-market firms’ seasoned equity offering activities. For firms from integrated markets, in contrast, the analyst-coverage-purchase hypothesis appears to matter more in explaining IPO underpricing and the aftermarket price appreciation explains these firms’ seasoned equity offering activities. The evidence, therefore, clearly supports the notion that some firms are willing to leave money on the table voluntarily to get a more favorable price at seasoned offerings when they are substantially wealth constrained, a prediction embedded in the signalling hypothesis.

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File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/0810netti.pdf
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Paper provided by Bank of Finland in its series Research Discussion Papers with number 10/2008.

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Length: 42 pages
Date of creation: 06 May 2008
Date of revision:
Handle: RePEc:hhs:bofrdp:2008_010
Contact details of provider: Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/

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